Markets Plunge Again

Wall Street tumbled to a three-year low on Wednesday after the rescue of AIG failed to calm a crisis of confidence in global markets, leaving banks scared to lend to each other.

WALL STREET STOCKS PLUMMET

Rattled investors worried about who could be the next victim of the global credit crisis, prompting them to dump financial shares across the board.

Morgan Stanley shares tumbled as investors worried whether it would survive as an independent investment bank and Goldman Sachs, plunged after a series of downgrades.

The volatility in Morgan and Goldman is outrageous and things have to get cleaned up soon, says Pete Najarian. It’s intense.

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AFTER HOURS ACTION: MORGAN STANELY CONSIDERS MERGER

Morgan Stanley, one of the two last major American investment banks, is considering a merger with the Wachovia or another bank, according to people briefed on the discussions, reports the New York Times

The talks are preliminary and no deal may emerge. Wachovia declined to comment.

They are strange bed fellows, muses Karen Finerman. But I do understand the need for that deposit franchise.

Their cost of funding is going through the roof, adds Guy Adami. That’s what it’s all about.

I thought the earnings out of Morgan Stanley were great, says Pete Najarian. They performed extremely well. I think CEO John Mack did an outstanding job.

What do you think? We want to know!

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AFTER HOURS ACTION: WASHINGTON MUTUAL

Washington Mutual, the struggling savings and loan, has put itself up for auction, according to a report in the New York Times.

“Goldman Sachs, which Washington Mutual has hired, started the auction several days ago.. among the potential bidders that Goldman has talked to are Wells Fargo, JPMorgan Chase and HSBC ,” the paper says.

The market appears to still be unsettled despite the bridge loan for AIG and earnings data from Goldman and Morgan that beat Street expectations. When will Wall Street be out of the woods?

Word on the Street

The Fast Money guys take a look at today's top business stories.

“You have to understand what went wrong and what’s busted in the current system,” counsels Sean Egan of Egan Jones ratings agency. Only then will the situation improve.

He thinks we have some work to do. Egan says we have to… re-establish trust, increase transparency, clean up the market, match long term capital with needs and reform the ratings agencies. Also he says accounting rules have to change.

Here’s the billion dollar question - Are American financial institutions as bad as the price action suggests they could be?

"In the case of Morgan Stanley and Goldman the cost of funding has gone through the roof," explains Egan. "They have $1 trillion on the balance sheet. If their funding costs increase 200 basis points or 2%, that’s an extra $20 billion per year that they have to make up."

The Bottom Line: Unless we get the borrowing costs under control the problem will perpetuate.

To see the complete interview with Sean Egan please watch the video.

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BIG FLIGHT TO SAFETY

Gold prices soared Wednesday, jumping more than $60 an ounce as mounting credit market turmoil prodded jittery investors to pull money out of equities and into safe-haven assets.

An article came out in China’s official newspaper, explains strategic investor Dennis Gartman. It acknowledged the fact that China may have no choice but to diminish the use of the dollar at its reserve currency and they talked about gold. When that article came out gold just skyrocketed. Another $20 or $30 to the downside and I’m a buyer.

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